 Systemic risk from overlapping portfolios: A multi-objective optimization frameworkAlessandro Sulas, Dietmar Maringer and Sandra Paterlini International Review of Financial Analysis, 2025, vol. 97, issue C Abstract: We present a multi-objective portfolio optimization framework that accounts for both systemic risk arising from overlapping portfolios and individual risk. To address non-convexity in the objective function, we introduce an Evolutionary Search algorithm that enables efficient exploration of the solution space. Applying our framework to EBA data on sovereign exposures, we find that minimizing systemic risk results in highly concentrated and diverse portfolios, adding empirical evidence to a growing literature on the ambiguous effects of diversification on systemic risk. In contrast, individual risk optimal allocations exhibit high portfolio diversification and homogeneity. By characterizing a set of Pareto frontiers, we identify a trade-off between the two risk components. Even a small preference for minimizing systemic risk leads to optimal portfolios on the frontier that differ significantly from the observed ones, suggesting potential inefficiencies in actual portfolio structures. Keywords: Asset allocation; Diversification; Networks; Fire sales; Evolutionary search (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:97:y:2025:i:c:s1057521924007269 DOI: 10.1016/j.irfa.2024.103794 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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